PEIS 101

Modern Theories of Political Economy

Introductions

• Beverly Crawford• Darius Ornston dornsto1@berkeley.edu• Rebecca Tarlau becktar@gmail.com• Tari ellis tari.ellis@gmail.com• • The syllabus is at:• http://bev.berkeley.edu

Political Economy

• The relationship between power and wealth. Two of the most important driving forces in the world today.

• The psychology of political economy is not very attractive: – pursuit of wealth driven by greed and envy; – pursuit of power driven by pride and insecurity.

• Is there a difference between power and wealth?

Wealth and Power are closely related

• So the separation between politics and economics should not be so great:

• Economic changes not only lead to political changes, but they are political changes..

Political Economy is about an institutional relationship

• between the institutions of Wealth and Institutions of Power.

• Between the markets and governments.

What will happen as you do the work for this course:

• You will see the world differently

• You will know more where you are headed

• How? You will look at different and opposing arguments about the relationship between politics and economics– 1.The international financial crisis– 2. National and global wealth and poverty– 3.why wealth and power seem to be shifting from the United

States to Asia and other rising economic powers?– The environment

• What you will learn: to figure out what you need to know in order to judge for yourself what the better argument is.

Why do we need that skill?

• Are we living in the best of times or the worst of times?

Two institutions: markets and democracies have come to dominate political economy

• Markets and democracies (with some modifications and holdouts

• In particular, the institution of the market has spread around the globe: markets spread wealth

• and democracies disburse power---so that each of us has some. When each of us has some power, we have the freedom to do what we want.

What unites the two institutions?• Theoretically both are based on the principle of

freedom of choice-

• The Bush administration believed that the marriage of free markets and democracy would spell what Fukuyama calls the “end of history” a state of global peace---because markets seem to be good at producing and distributing wealth---and they permit people to be FREE to buy and sell as they choose.

• These two institutions are built on the Value of

Freedom, as the foundation of political economy

A global rise in Living Standards: markets create winners

But markets also create losers…• market economies have high levels of

inequality---both nationally and globally. • Nationally: • the gains from American productivity have gone

to just a small segment of the population—those already in the upper part of the distribution. As a result, inequality has grown.

• 1997 to 2001, nearly 50 percent of productivity gains went to the top 10 percent of the distribution.

The United States…

• From 1995 to 2005 The United States was the most productive of all of the OECD countries except Sweden, Iceland, and Finland.

• When you are productive, you have economic

growth. US economy grew by 3.27% during that period of productivity, slightly behind Finland, Iceland, and Australia.

Wealth is concentrated….

Decline in real wages

Much of the world doesn’t fare as well as U.S. workers…

Why?

• Different Theories have different answers• One answer claims that the market favors

winners, those who are most productive.• And the market itself is dynamic……

The Market is dynamic: The Business Cycle

•Prosperity•Transition•Trough•Recovery

??

Another view: Is the Market unfair?

• In times of both prosperity and depression, the poor and the losers may seek power to obtain what they see as their “fair” share of the wealth.

• The wealthy seek power to maintain their “fair” share of the wealth

• All want government intervention in the “trough”

• What is “fair?”

Or just too harsh…..All call for Govt. intervention in the Trough

•Prosperity•Transition•Trough•Recovery

??

Here we are ↑

OLabor and Capital want Government Intervention

O

When the market is perceived as “unfair,” or just too harsh….those hurt turn to government to protect

them

• But what should the government do?• In the trough, should government……– Provide universal health care?– Bail out Wall Street?– Bail out Main Street?– Leave well enough alone—stay out of the market?

•

And countries can be “losers” in the market too.

China surges aheadClosing wealth And power gapWith the West

Should NAFTA be renegotiated because the US isn’t benefiting from it?

• Obama said he’ll unilaterally end NAFTA if Canada and Mexico negotiate what is “unfair” to U.S. workers.

• So democratic governments are tempted to restrict markets when they fall behind in market competition…..

• McCain said free trade should remain free and unrestricted—that the government should stay out of the market.

• For both, we saw that when the market punishes those who are not creating wealth, political power should bail out the losers.

Many believe that Markets go through this cycle without government intervention….

•Prosperity•Transition•Trough•Recovery

??

So what?

• When your country wins or loses in global competition, Your prospects are affected.

• Are you well-positioned to win in global market competition?

• Should the government intervene when it’s citizen’s prospects are dim?

• Or should the market correct itself?• This course will help you figure out the answer

Theories of Political Economy provide answers

• But the answers are contradictory!• They lead to opposing political beliefs• Example: McCain advocated Free Trade,

Obama advocated government intervention in the global market on behalf of Americans…

Three Theoretical Approaches

• Each rests on a different value as its foundation

• Freedom• Equality• Community

http://flowingdata.com/2008/04/25/poverty-statistics-that-make-sense-welcome

http://www.gapminder.org/videos/ted-talks/hans-rosling-ted-2006-debunking-myths-about-the-third-world/